Citizens Financial Group, Inc. (CFG) Earnings Call Transcript & Summary

Great. Moving right along, next up, among the U.S. banks. Very pleased to have Citizens Financial with us. From the company, we have Bruce Van Saun, Chairman and CEO. Bruce is just going to take us through some slides to kind of give you guys a quick overview and level set. And then we'll jump into a fireside chat. So Bruce?

Okay. Thanks, Jason, and good morning, everyone. Pleasure to be here today. So I'm going to just offer a few brief remarks, and then we'll go straight to Jason. Here's our cautionary language, which you can read at your leisure. Okay. So we just finished our first quarter results, I'll offer a few comments about that, but I would describe the quarter overall is very solid. Highlights include very strong capital and liquidity position. We continue to do a good job on deposits. We have a very granular retail-oriented deposit base and our beta performance through this hike cycle has been slightly better than the peer median. We also have continued to stay within expectations on credit within our guidance and all our credit metrics are tracking as expected. Our reserve levels around the portfolios of most interest to folks are very strong, overall reserve strong, general office, 10.6%. And then we have most of that is about defense, but we also have some really interesting offensive initiatives that are taking place. We have our private bank lift off. We have the New York Metro play, our effort to serve private equity and private capital and then our TOP 9 program. In addition to that, we also anticipate meaningful lift in our NII and our NIM coming from the burn down of non-core and legacy swaps portfolio. So we feel we're really well positioned in the medium term to outperform. For just a refresher about our franchise. Today, our consumer bank is really focused on the northeast of the region of the U.S. We did fill in the New York City hole that we had through the acquisition of HSBC's East Coast branches and investors banks. So now we're contiguous through the regions. That gave us 200 branches in the New York Metro region and 1 million new customers, top 10 deposit market share. We also serve all 50 states digitally through Citizens Access. We are opening up branches in our footprint for the private bank in Boston and New York, also in Palm Beach, Florida, and then 3 in the San Francisco Bay Area. So we're going to further expand around the country there. And then our commercial bank is in most of the big cities around the country as well. If I look at the businesses here, it's interesting. We're creating what I would refer to as a 3-legged stool, where we have really strong digitally transformed advice-based consumer bank. We're serving the mass affluent and affluent customers, got a really solid low-cost deposit base. There's continued opportunities for us to deepen in consumer, particularly around wealth advice. The commercial bank has positioned itself well to serve middle market companies and then the sponsors who invest in middle market sponsors own over 50% of the middle market companies in the country. So we have really positioned ourselves well there in terms of the coverage bankers and focus and then all the products set. And then lastly, that important third leg of the stool is around the private bank and private wealth opportunity where we did a huge lift out last year of First Republic Talent and are scaling up that business. Capital is always critically important, and we've managed ourselves since the IPO 10 years ago to have one of the higher capital ratios in our super regional peer group. And so with the first quarter results were around 9% if you exclude AOCI, which is near the top of the regional bank peer group, which gives you lots of flexibility to support growth in terms of loans and credit that our customers need, but then also have a toggle switch to do share repurchase. So we like having that optionality. In the deposit base, again, I mentioned it's a highly attractive deposit base and it's evolved over time. It's very well diversified by both business as well as by product type. So we've made continued investments in the consumer capabilities and the commercial capabilities and now Private Bank brings another avenue for deposit growth. And if you look at the net results here down at the bottom of this slide, you see that in terms of the percentage of consumer near 70% the noninterest-bearing and low-cost deposit mix has stabilized in the low 40s are not surprisingly given the high percentage of consumer deposits, the percentage that is insured and secured has been around 70%. And then we also continue to just bolster liquidity. So we've put certain loans into runoff like auto like some of the flow agreements we had with SoFi and Affirm. And so we're okay having loans run down and investing some of that capital in the securities book. We've also been issuing some longer-term debt. Our Federal Home Loan Bank borrowings are down all the way to $2 billion. So we have a lot of backup firepower in terms of contingent liquidity. So the LCR now is 120% if we were on the same basis as the mega banks, which would be a number larger than the mega banks. So really feel good about the balance sheet. Just to elaborate a little more on how much the deposit base has transformed. If you look at some of the sequential interest-bearing deposit cost progression from a year ago, where the green peers are and the peer median is in the gray, but we've been inside the peer median for the last 5 quarters. And as a result, if you look down at the bottom, you can see that we're slightly better than the peer median. So that wasn't the case. If you went back to the last time rates went up. We were kind of out in the #10 of 10 positions. So now being where we are, shows the amount of work that we've invested into the deposit franchise and the progress that we've made. The other interesting aspect is credit. And so if you go back to the IPO, we had been under-levered and shrunk the balance sheet. So we had enough capital to actually grow and grow our balance sheet back to regain our profitability. And I think that stuck in people's and that grew that fast and relevered, were they taking undue credit risk. But if you look at the track record since the IPO in terms of our charge-off rate, it's been pretty much on top of the peer average and that applies for retail and commercial. So again, I think we have been very prudent in our credit risk appetite, but we have to go through the fire and prove it through a cycle. And I think we have the opportunity to do that here as charge-offs have drifted up a bit above the through-the-cycle average. Our CRE portfolio is, I think, well reserved. It's behaving as expected. So I think we're managing that credit risk well. And we maybe had a little bit of a shorter profile to the book a little more construction. So those charge-offs are a little elevated. But again, they're behaving pretty much as expected. And then if you look at the consumer side, we've stayed very focused on high-quality segment of the market, super prime borrowers and prime borrowers. So we're seeing no surprises there. Just flipping to the businesses and a brief highlights of the businesses, but the consumer bank has really been transformed, and I think it's very attractive relative to our peer group. Some of the proof points of the progress that we've made are laid out on this slide. But if you look at on the top left here, deposit performance. We had very strong growth in low-cost deposits, a 7% CAGR over 5 years. We've been very focused on deploying our loan capital into deeper primary relationships. And so we've exited things like indirect auto and wholesale mortgage and some of the flow agreements, and we're staying very focused on the suite of HELOCs mortgages, credit card and student. We've been investing in digital. And so you can see some of the stats here about good ratings on our app and growth in mobile users, growth in digital payments. So feel good about how we've transformed that side of the business. If you look at just growth metrics in terms of customer growth, we're probably growing faster than most of the banks in the peer group, again, we're focused on the mass affluent and affluent and have a very good value proposition for those segments. We have the New York play, which offers us a lot of growth because the predecessor banks weren't serving their customers the way we can. So even though New York is a tough and challenging market, we've made huge progress in terms of driving growth. And then wealth management here as well, we're getting to deepen. And so we're able to grow relationships and grow assets under management. In the past year, we were up 15%. Next up, just a few words on the Private Bank, which we launched last year as a real exciting opportunity. And frankly, there's a big void in the market where First Republic used to play and people are scrambling to try to figure out how to go take that customer base. And it starts with talent. And so we had the opportunity to bring the world-class private bankers from First Republic who didn't want to go work at JPMorgan. They looked for another bank that had a really good customer culture and was the right size that they could kind of recreate 2.0 and they came to Citizens. And so we think we're off to a really good start. You can see $2.4 billion in deposits at the end of the first quarter. Deposit mix is very attractive. So about 1/3 is DDA or low cost. The loan book has been very solid. It's mostly commercial. The yield on that book by the way is 8%. So we have more than a 5% spread between the loan yield and the cost of deposits. And AUM is starting to build, and we just lifted out a big team to join us in San Francisco. So part of this is going to be broadening out what we have. We have Clarfeld Asset Management, but we need kind of more scale on the private wealth side. So we're looking to do further lift outs. We did say financially that this business would breakeven this year in the second half, the lines will cross, it will become profitable. And then we let some markers out there for 2025 of $9 billion of loans, $10 billion of AUM, $11 billion of deposits. If we hit those metrics, we should be about 5% accretive to the bottom line. So a big investment but potentially very big reward. Moving to Commercial Banking here. Again, I think we're exceptionally well positioned. I take our positioning versus anyone in our super regional peers. We have great coverage bankers and they're focused on where we see great opportunities for penetration and growth either the industry verticals, the regions of the country, middle market and sponsors, as I mentioned. And we have now built out the full capabilities. So either through organic hiring, team hiring, acquisitions. We have a full product capability. And you really haven't seen the full benefits of what we've assembled because with higher rates in the last 2 years. Activity levels have been subdued in the first quarter, things started to turn. And so we were up 35% in Capital Markets fee revenues in the first quarter versus the fourth quarter, and we think that we'll continue to see strengthening environment. So the kind of validity and the positioning of what we've assembled will start to really manifest itself, I think, as activity levels continue to pick back up. Just a note on the bottom right in the league table results, we tend to be in the top 5 banks in the U.S. for the lead arranger of leverage deals in the middle market and in the top 10 overall in the middle market. In the first quarter, we were #1 in the leverage lead tables. By the way, JPM was #2 and BofA was #3. I can't resist just sneaking that one in. But in case you wonder, are we able to compete with the big boys, the proof right there says we are. So let me just sum up again by saying I think this is a really attractive investment opportunity for investors. We've assembled a really strong team, leadership team, and we have a great track record of execution. We've launched some exciting initiatives that are pretty unique and pretty powerful assuming positive execution. We also continue to keep a really strong capital liquidity and funding base, which gives us lots of flexibility if things like we saw the bank failures last year, and we got to bid, and we've got to then do something on the back of that and taking a bet and launching the private bank. So keeping that capital and overall strength is important. And then when we think about the medium term, we see a very clear path in terms of how we get back to 16% to 18%. We were 16.5% in '21, 16.5% in '22, last year 13.5%. But through a number of factors, just the way we're positioned in terms of NII and some of the burn off of the legacy swaps in non-core. That's going to be really positive. The private bank flipping from a drag to being accretive, plus 20% plus return on equity and then non-core, which is a drag running off, we can have pretty good transparency and visibility in terms of how we get back to that 16% to 18%. And that should reflate the stock over time. So anyway, that's it from my prepared remarks. And Jason, I'm happy to take it wherever you'd like.

Sure. Thanks, Bruce. Appreciate the overview. Maybe we could just dive into more maybe just big picture and what you're seeing in your footprint, you're obviously out talking to customers regularly. But outlook for the economy, what's the sentiment? What are you hearing from clients?

Yes. So I would say up until recently, the business folks were pretty cautious, and we saw that through our line utilization was continued to trend down a little bit. So most of the businesses are having really good success and making good levels of profitability, but are not ready to step in and take that next level of investment in working capital or in CapEx. And I think slowly, that's starting to shift. And it's like the broader environment, people are saying, "wow, this economy is more resilient than we thought. We're not really talking about the Goldilocks anymore, that's become more the baseline scenario that we may have growth slow, but it's really not going to go into a recession". I think that's starting to turn sentiment a bit positive. So it's only a month, but we saw line utilization tick up a little bit in April, which was a good thing to see. So I don't think you're going to see anything really hit an inflection point and bounce. But I think you'll just see things gradually. It will get more data that the economy is still pretty robust, and we're unlikely to slip into a recession, and that will force people to decide to start playing a little more offense.

Got it. And it is remarkable to see where Citizens is today relative to where you were in 2014 when we kind of did the IPO road up. So kudos to you and the team. But just maybe talk to kind of maybe what you're most proud of, where you kind of have more work to do?

Sure. I would say that we've had a major transformation of where we started and those kind of things start with building a great leadership team, a great Board, putting in the right culture and getting the foundation laid well. So I feel good about all that, that we brought in some really good people, set up a really good Board. We've got a culture that focuses on the customer and delighting our customers and teamwork and collaboration and people are attracted to that. They like we've been able to attract talent because of that. We've tried to be innovative. We try to stay focused on excellence. We keep a mindset of continuous improvement. If we want to spend money, we have to figure out how to wring out efficiencies through things like the TOP programs. So I feel good about all those. The foundation also required big investments in technology to modernize the technology stack to go digital, to have better risk management, better people systems, you name it. So there's a lot of building to do. But then I think we hit a flex point and started really playing offense like what do the businesses really need to serve customers better, what technology investments, what people investments, what acquisitions should we do. And I think we've been smart about how we've gone about that. So getting to that 3-legged stool where the consumer business is strong, commercial is extremely well positioned. And now we have this exciting opportunity for the private bank. It's been quite a journey, but I think it's all right in front of us. I like the hand that we have today.

And then one of the last points you made from the slides was that on that 16% to 18% kind of ROTCE target. Maybe just talk to kind of when do you think you can get back into that range, maybe some of the key drivers and does regulation change that?

Yes. So to me, '24 is still a bit of a grinded out year. We're still suffering the [ FX ] of the higher interest rate environment and a little bit of a drag on the net interest income, at least through the first half of the year. So I'd say when I look past that, though, I think if the economy stays reasonably in a moderate growth range, which is expected and then rates start to come down, I think there'll be a lot of benefits to net interest income. I think that benefits to credit. And so the core business that we have, I think, will really start to lift off as we get in '25, '26, '27. And then the private bank flipping to 5% accretive next year, non-core will be down from $14 billion to $5 billion. All those things just build steadily once we get to the later end of this year into '26 and '27.

Got it. All right. So you talked a lot of strategic initiatives, which was very helpful. I want to delve more into there. I feel like I got a shift to some of the earnings drivers because you know me. But maybe start with net interest income. You talked about full year net interest income down 6% to 9%. Is that something you're still comfortable with? And maybe you could talk to what gets to the low end, high end of the range?

Yes. So I don't -- we just gave guidance fresh 3 weeks ago. So there's a whole lot to say just the first month of the quarter was good. So there's nothing that causes me to -- have to reflect any differently. I feel good about what we've laid out there. And I'd say on net interest income, the NIM actually is a big focal point. Can we continue to have pricing discipline on our deposit base and how much migration will we see? We're getting a little bit of help there that the private bank is growing the noninterest-bearing at about 1/3 the overall rate for the company is 21%. So that's helpful in keeping the percentage noninterest-bearing stable, which we were in the first quarter and helping the overall cost of funds. So a big focus on cost of funds. And then when you look at the second half of the year, we assume there's going to be a pickup in loan growth, an acceleration in loan growth. And so that's really twofold. One is the private bank starting to deliver more credit to their customers. And then the commercial bank, just the line utilization picking up is the economy, some of the factors I mentioned, people getting more optimistic about the economy and then deal flow picking up too, if we get a rate cutter too, I think you'll see private equity get more active. And so there'll be real new deals creation and the financing that goes along with that. So that's an important driver of where we come out in that range. I would say, is that loan volume. But in any case, we also have that flex toggle that if we don't get quite as much loan growth, we have a strong capital position and kind of where our stock is trading, it's pretty powerful to actually put away the stock. So we got a little bit of a built-in shocks over there. But at this point, we still think that we'll see that loan growth in the second half of the year.

And then I guess with respect to margin, you talked about kind of a 3.25% to 3.4% targeted NIM range. Can you maybe talk to what are the main drivers of that? When do you think you can get there, where you're positioned against the current rate?

Yes. So there's a lot of detailed analysis of the benefits of non-core and the benefits of the legacy swap runoff in the future, which undergirds that. But if we're at 2.90% today, there's 50 to 60 basis points of lift out of the swap portfolio itself. If you make an assumption that rates go down somewhat over the next 2, 3 years, we're asset sensitive structurally, so that would offset some of that benefit from the swaps. But if you net that out, 50 to 60 basis points would take you up to 3.50%. And then we said 3.25% to 3.40% because that asset sensitivity hurt you a little bit. That's how we get there. And I'd say, right now, we're just still, as in '24, just stabilizing, trying to find bottom, trying to keep it 2.85% or kind of above. We have some forward starting swaps that some kicked in at the beginning of the year, some more kicking in this quarter. There's other aspects and hire for longer that you're still getting more front book, back foot benefit, et cetera, et cetera. So people lose sight of that a little bit. But in any case, I think we'll kind of be relatively stable here and have a good visibility into '25 and start to see some of the benefits of these other drivers like non-core and the swap book.

Got it. And maybe just delve more into deposits. I guess twofold. I guess, first off, maybe your outlook for balances, price mix, it kind of rates to hire for longer. And then you made the point that your deposit beta kind of this cycle versus last cycle in a rising rate environment was lower, which was good. I guess how do you think about betas in the next cycle when the Fed cuts?

Yes. So I'd say mix, we'd like to be -- we kind of stabilized here in the low 20s. I think we can grow that back into the mid-20s. If you look out in a medium-term planning scenario. So we have continued effort and focus on growing low-cost deposits, particularly in the consumer bank and in the private bank. So I feel pretty good about that. And then in terms of the betas, we're probably near the end of the terminal IBD beta. And depending on the number of cuts, so you'll see that kind of retrace somewhat. You might have in the 25% range for the first couple of cuts and then that should start to build if you get more cuts and you end up down sub-4%. So we'll just wait and see how that plays out.

And fee income front you had good growth in the first quarter, up 3%, led by pretty strong capital markets activity. Can you grow again in 2Q? And maybe just kind of walk us through the main puts and takes for the rest of the year?